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  Mortgage Basics   Chapter 1: Rent or buy?
Hundreds of thousands of Americans ask themselves that each year. There's no easy answer.
 
   

How much house can you afford?

 

Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called "debt-to-income ratios."

Debt-to-income ratios
The standard debt-to-income ratios are The housing expense, or front-end ratio and the total debt-to-income, or back-end ratio.

Debt-to-income Ratios
Front-end Ratio

Example
Take a home buyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)

Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.)

-- Posted: May 1, 2006
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